Amazon/Deliveroo: 'The race is now on'

While consolidation has been a major talking point for many observers of the food delivery sector, a more pressing issue for newcomers like Deliveroo and Uber Eats has been profitability.

With Deliveroo losing a reported £15.5m a month, Amazon’s return to a space it left quietly after a half-hearted effort with Amazon Restaurants, promises to open up an “arms race” in the sector, according to IG Group’s Chris Beauchamp.

Yet while Just Eat’s share price fell upon news of Amazon becoming the lead investor in London-based Deliveroo, it is still the much bigger player, its dominance outside London giving it far greater reach.

“The race is now on, as Just Eat and others look for new investment to help them compete with Deliveroo and UberEats”, Beauchamp told MCA.

“Amazon’s move is a push into the premium end of the market, which will worry Just Eat, but if Deliveroo is looking to expand then it has a tough job replicating its model outside London, and this will be expensive to do and not necessarily successful.”

The sentiment that the news is not necessarily bad news for Just Eat, and that the onus remains on Deliveroo (and UberEats) to make their business model work beyond its metropolitan heartland, was echoed by Ian Whittaker of Liberum.

“If you look at Just Eat’s UK market, which is their most important, it is still three to four times bigger, than UberEats and Deliveroo’s combined,” he said. “60% plus of Just Eat customers are in smaller towns, where UberEats and Deliveroo model just doesn’t work.”

Whittaker suggested the impact of the cash could be negligible in the UK, with Deliveroo failing to become a dominantly player.

“Deliveroo has been talked about as threat for years, but hasn’t done a huge amount. Quite frankly I don’t see it as a major issue.”

Still, Amazon’s financial firepower is formidable, and it has a track record of backing winners -perhaps a self fulfilling prophecy - giving a vote of confidence to the so-called Uberoo business model.

“With Amazon pulling out of its restaurants offering in the UK at the end of last year, this demonstrates Deliveroo is a better place to put its money”, analysts from Peel Hunt wrote.

“While Deliveroo is still in its pre-profit, strategically loss making, phase, as it invests for growth, if any company knows about the benefit of that strategy it is Amazon.

“After Uber’s IPO last week that raised $8.1bn and now Amazon’s investment today – both in aid of the more expensive delivery side of the takeaway market – these will put more pressure on Just Eat which has only recently started out on that journey.”

And Just Eat could yet come into the mix and become a target for US players.

Beauchamp added: “Just Eat is still a takeover target as well, since it has much broader reach than Deliveroo, and US firms like GrubHub are already looking to expand internationally.”

Meanwhile activist fund Cat Rock Capital, a 2% shareholder in Just Eat which has been repeatedly critical of the platform senior management, said the news showed Just Eat needed to take part on a global consolidation.

Alex Captain, Founder and Managing Partner, said: “Just Eat possesses very strong positions in its core markets, and we believe that the company’s strategic value is clear.”

“While we are surprised that Amazon chose to back one of Just Eat’s small and cash-burning competitors, we are confident that Just Eat’s significant strategic value will be unlocked if the board engages with the many potential strategic partners available to the Company.”